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Quizno's Franchisee Loses Again

An appellate court decision illustrates the perils of lease assignments and brand-specific lease clauses. The franchisee can not use the premises, but must pay for the lease term anyway.

William Simpson opened a store at 824 Broadway, in lower Manhattan. He personally guaranteed the obligations of the lease which was issued to his operating corporation.

Simpson's entity then sold the store to an entity controlled by Imran Lakhani. The transaction was an Asset Purchase Agreement plus an Assignment of the store lease.

Subsequently, Lakhani ceased operating as a Quizno's, and he converted the store to a new name.

But when Lakhani tried to pay the rent, the Landlord refused to accept the money; the Landlord said the lease was for the operation of a Quizno's store and so not only did the Landlord refuse to accept the rent, it declared that William Simpson (the original personal guaranty) owed $226k.

Simpson then sued Lakhani.

The lease provision at issue stated, according to the appellate decision:

Tenant shall use and occupy the demised [premises] for a [Quiznos] sandwich shop for purposes of an eatin/ take-out/delivery restaurant selling sandwiches, salads, soups, pizza, frozen desserts (yogurt, ice cream), fruit juice-based blended drinks, non-alcoholic beverages, and other food items sold in [Quiznos] sub stores (no cooking permitted, except solely that Tenant may utilize an electric convection oven) only ... and for no other purpose whatsoever.

The trial court denied summary judgment, saying

The lease in question does not define approved "purposes" as the operation of a Quizno's sandwich shop. The name Quizno's does not appear after the word purposes where the definition of approved purposes appears. Therefore, this Court cannot, as a matter of law, determine on this motion if the operation of the location as other than a Quizno's is subject to the "no other purpose whatsoever" clause.

On appeal, the trial court was reversed and judgment entered.

The plain language of the lease supports Simpson’s position that Lakhani Enterprises breached the lease by failing to maintain the premises as a Quiznos franchise (see Vermont Teddy Bear Co. v 538 Madison Realty Co., 1 NY3d 470, 475-476 [2004]). Accordingly, Simpson is entitled to an award of summary judgment in his favor on a guaranty between him and third-party defendant Lakhani that is conditioned on a breach of the underlying lease.

There are several lessons for franchisees:

  1. As a Personal Guaranty, you can be liable to the landlord long after you have sold your store. Some leases even hold you liable for "renewals, extensions, and modifications" of the lease-- you can theoretically be liable till the end of time. If Lakhani has no money, then Simpson will have to pay and the appellate court decision is worthless as a practical matter.
  2. An "assignment" is not a "novation"-- if you sell your store and are a personal guarantor, you are still liable for the payment of the lease. The solution is to negotiate a provision in the initial lease providing for the substitution of a new Guaranty: don't rely on a "good guy" provision since those normally require that you be able to surrender possession and obviously you can't do that after you sell your store.
  3. Be careful of leases which require that you operate as a particular trade name. There are a number of situations in which this can be a problem, and Mr. Lakhani's situation was only one of those possible situations.
  4. A landlord can refuse to accept rent if you are not in compliance with the lease, and then sue the personal guarantor(s).
  5. A landlord may be under no obligation to mitigate damages. That means that if there is a deep pocket, the landlord can make more money keeping the store vacant and racking up rent and penalty fees. One solution is to insist on a mitigation clause and/or a limit of personal liability.

Many of these onerous provisions can be dealt with if you properly negotiate in the initial lease. Once the lease is signed, you are stuck.

_______________________________________

12 Broadway Realty LLC v Lakhani Enterprises USA Corp & William Simpson

Appellate Division, First Department (NY), March 13, 2014

For William Simpson: Eli S. Cohn, McDonough Law LLP (New Rochelle NY)

For Imram Lakhami: Howard Justvig, Becker Ross LLP (New York)

AttachmentSize
12 Broadway Realty v Lakhani APP DECISION.pdf211.34 KB
Lakhani Order denying Summary Judgment.pdf41.2 KB
Lakhani Answer.pdf210.29 KB
Simpson Answer (Lakhani case).pdf140.26 KB
Simpson v Lakhani 3rd Party Complaint.pdf180.34 KB
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Corbin is the online pen name of a contracts aficionado who needs to get a better hobby.

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